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FHA Loans: Non-Occupying Co-borrower Requirements

In our last blog post we discussed the FHA loan rules for parents and children who want to apply for an FHA loan together. A parent who acts as a non-occupying co-borrower on an FHA loan for a condominium for a child in college, for example, would be eligible for 100% of the maximum FHA loan amount.

Compare that to non-occupying co-borrowers who are not related; such loans are limited to 75% of the loan-to-value ratio. The family status of a borrower and non-occupying co-borrower is an added benefit in such cases.

But the FHA has additional rules for non-occupying co-borrowers. For example, all co-borrowers are required to sign the FHA loan regardless of occupancy status. On the surface, that rule wouldn’t seem terribly important, especially in a situation where a parent is trying to help his or her child with living expenses while in college. But this “signature rule” can be viewed as an important part of enforcing a larger set of regulations.

FHA requirements state “If the LTV exceeds 75%, a mortgage with non-occupying borrower(s) is limited to a one-unit property.” A parent and child would not be allowed to purchase a multi-unit property together with 100% maximum financing. What’s the reason for this rule?

The FHA forbids a non-occupying co-borrower arrangement in order to purchase investment properties or rental units. The co-borrower relationship must be used for an occupying borrower when taking advantage of the family status rule that allows the maximum FHA loan amount.

With that in mind, the FHA requires the co-borrower’s signature in part to keep the system honest. According to FHA rules,”The non-occupying borrower arrangement may not be used to develop a portfolio of rental properties. The financial contribution by the nonoccupying borrower and the number of properties owned may indicate that the family members are acting as ‘strawbuyers.’ ”

By having both parties sign the loan, the lender is able to verify the status of that loan as a bona fide primary residence for the occupying co-borrower–or reject the loan on the basis that there is a pattern of investment property purchases.

The acceptance or rejection of the non-occupying co-borrower in such cases is left partially to the discretion of the lender. The FHA gives the lender room to exercise judgement on a case-by-case basis in many situations including this one.

29 Responses to FHA Loans: Non-Occupying Co-borrower Requirements

  1. Brianna says:

    Hello, our mortgage lender told us yesterday (two months into building) our home that a new requirement came through FHA for student loans. I am in school right now and have at least 2-3 years left plus then defferment of 6 months. She told us that we need to now include these loans into the calculation. This is a big change as we are now required to get rid of a car payment and pay off a majority of our credit cards to make this work. It just seems really odd to us that all of a sudden this would come into effect with no notification. Can you please confirm what we were told?

    • Joe Wallace says:

      Hi Brianna, was your lender stating a new FHA requirement or the bank’s requirement? That’s an important distinction to make…

  2. Kimberly says:

    I am looking to purchase a home. Between my fiancee and I, I am the only one going to be on the loan because of his credit. We were looking to purchase a home that is more that what I am approved for by myself. His parents offered to be a non occupying co-signer, but my mortgage broker said that we can not use them because they are not a blood relative of mine(since we are not married yet). Is this right? A friend of mine said she did it this way..I am just wondering why I cant?

  3. GeeGee says:

    Hi i recently was pre-approved for a FHA mortgage loan on a 2-family house with the help of my aunt and uncle. I signed contracts and put a deposit down to the seller through their attorney, to later find out by the mortgage broker that they had to move in with us in order to get the loan! my dream of buying a home have been crushed!!! is their any truth to this and is there anything else I can do?

    • Joe Wallace says:

      A lot depends on how the loan was drawn up. Are the Aunt and Uncle co-signers on the loan, are they considered co-borrowers? Have they been named as non-occupying co-borrowers on the loan? More information is needed to address this question properly, but I suggest you contact the FHA directly for assistance: (800) CALL-FHA or (800) 225-5342.

    • James says:

      Im going through that same situation as we speak got that phone call saying my Co- borrower may need to live at the residence the FHA is giving the loan for or its 25% down, what???? He has a family and theres no way for him to move into my Apartment which “I am” a live in Borrower .. Did you get any answers ? Ive been researching for hours on FHA requirements and guidelines and i didnt find anywhere where they state the co-borrower has to live at the residence.

      • Staff Writer says:

        Have you checked to see if that is a lender requirement as opposed to an FHA requirement? HUD 4000.1 states specifically:

        “At least one Borrower must occupy the Property within 60 Days of signing the security instrument and intend to continue occupancy for at least one year.
        203(k) Rehabilitation products may have different requirements for the length of time to occupy the Property.”

  4. Bri says:

    We are looking in to getting approved for a non-occupying co-borrower fha loan with the help of my parents. We live in Texas. Do you know if we can still get down payment assistance?

  5. Pete says:

    Hi! I agreed to be a non occupant co borrower to my cousin but i am having 2nd thoughts. Could u please explain how long before my name is removed as a co borrower from the loan and what are ways to get my name off the loan once i decide to buy my own home. Thanks!

    • Joe Wallace says:

      What does your loan agreement say? Much depends on the terms of your loan agreement–best advice is to speak with your loan officer to get guidance.

  6. Adan Jimenez says:

    question., can my brother in law be my coborrower trough FHA with 3.5% down even do he got a home trough FHA

    • Joe Wallace says:

      That might depend on the circumstances of the co-borrower’s other financial commitments. The lender would have to approve the application based on the financial information submitted, so credit rating, debt-to-income ratio and other factors would apply for both borrowers. Call the FHA directly at 1-800 CALL FHA to get advice for the specifics of your situation.

  7. Michelle White says:

    Hi there,
    I had a question: Can my mother co-sign an FHA mortgage for me even if she has a veteran’s loan for her home. Will they use my credit or just hers or both I am confused. My credit is not so good but she is willing to help so I don’t know

    • Joe Wallace says:

      Hi Michelle–the lender will check the credit, income and debt ratios of all parties financially obligated on the loan. If the debt-to-income ratio of any party is too high it may affect the approval of the loan. Contact the FHA directly at 1-800 CALL FHA for a referral to a housing counselor near you for help with pre-purchase issues such as credit and other concerns–hope this helps!

  8. Adriana says:

    Does one of the co-borrowers have to be enrolled in college, or can one of the applicants be a young employed adult.

    • Joe Wallace says:

      FHA loan rules require all co-borrowers to be of legal age to sign contracts according to the laws of that particular state.

  9. Heather says:

    We are in the process of purchasing our first home using a non-occupying co-borrower. We were first told that if we put 20% down we would not have to pay the mortgage insurance. We came up with the 20%, but now we are being told we are required to pay the mortgage insurance for the live time of the loan. We were told we can refinance after a year, but I am assuming this is IF we can refinance by ourselves without the co-borrower which is unlikely as we are self employed. I do not understand why we need the mortgage insurance when the bank already has the 20%? Is there any way around this?

  10. Crystal says:

    I am currently unmarried, but living with my fiance. We don’t know when we are getting married yet.
    We went to get pre-approved for a mortgage on a house valued at 113,000–we are going to offer 105,000.
    The Loan Originator told us that everything was perfect except for MY income, which is low (right now) because work has been slow. I could wait 2 months for work to pick up, but the house may be gone by then.
    There was the option for an FHA loan with my mother as a co-signer, but the LO was advising against it (for good reason). He was saying that the LTV would be 75% and we’d owe upwards of 20 grand as a down payement. My question is:
    Because we aren’t married, is this affecting the LTV rate? I am related to my mother, obviously, and I know that if you are related by marriage, law or blood, the LTV can be up to 95.6%. What’s the deal? I can’t reach my LO right now and I’m trying to get this answered asap. Hope you can help!

    • Joe Wallace says:

      You would need to discuss this situation with the loan officer because it sounds like lender policy may be affecting the LTV.

  11. Michelle says:

    I was all set to close on a home in another state next week. I was to be the co-borrower because I won’t be moving into it right away because I need to sell my house in my homestate. My boyfriend will move in. Today he called to say I can’t be on the loan at all because we aren’t married or related and I’m not moving in right away. Is this true?

    • Staff Writer says:

      If the lender is citing standards for that financial institution, it may be true–if you don’t have a specific move-in date that may affect how the loan is processed.

  12. judie says:

    Im cosidering cosigning on a rental property for my son so he can move in with friends. He has no credit established yet. My husband and i are also in the process of looking to move. How will cosigning affect us if we want to buy in the n ex xt 2-6 months and go with an FHA loan

    • Staff Writer says:

      FHA single family home loans are for residential properties only. If you are looking to purchase a rental property and continue to use it as such, you would have to discuss your other loan options with a loan officer. All co-borrowers have to credit qualify for the FHA loan.

  13. Adam says:

    I currently rent an apartment. Do I have to move out after helping my parents co-borrow?

    • Staff Writer says:

      Hi Adam, thanks for your question. I’m not quite sure I understand what you are asking. Are the buyers purchasing a property you are currently living in?

  14. Dianne says:

    I am currently trying to purchase a multi family home in Massachusetts since I cannot approve on my own my father is willing to be the co borrower but he does not live in the state of Massachusetts. My lender said that it is possible to purchase the home because I will be occupying it but I also heard that there is no way that is possible. Is it or is it not possible to have a coborrower on a multi family?

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